ESG+ Newsletter – 31 October 2024

This week’s newsletter looks at a study on human rights regulation which reveals that, while intentions are well placed, better enforcement is needed to ensure compliance. We also review ESMA’s annual corporate reporting statement which gives insight into what it will focus on in the year ahead; look at the global growth of TNFD reporting; and, whether the UN-backed carbon market, which looks set to be ratified at COP29, will offer hope for aspects of carbon offset market. However, we open this week’s newsletter with a review of the new Labour Government’s inaugural budget through an ESG lens.  

UK Budget 2024 – ESG highlights 

The headlines from the first budget delivered by a Labour Government since 2009, focused on plugging a £40 billion gap in the country’s finances and efforts to stimulate the UK’s stagnant economy. However, from an ESG perspective, there were a number of interesting developments, including: taxes on private jets; an extension of EV incentives; an increase in the rate of windfall tax on oil and gas companies; and, a commitment to investing in clean energy and net-zero technologies such as green hydrogen and carbon capture and storage. While these policies have been welcomed, the decision to maintain a 14-year freeze on fuel duty paid by motorists on petrol and diesel has irked some. The extension of the 14-year freeze in fuel duty is viewed as both costly and impacting the UK’s net zero target, as evidenced by a report by Carbon Brief indicating that UK CO2 emissions are 7% higher than they would have been without 13 years of fuel duty cuts. The UK Government also announced that it will launch a consultation into ‘scope 3’ emissions from offshore oil and gas production to provide guidance on assessing the end-use emissions of oil and gas projects. 

NYU study calls for more efforts to ensure compliance with human rights regulation 

A new study from NYU reviewed the rise and key principles of human rights regulation, ranging from voluntary initiatives like the UN’s Guiding Principles on Business and Human Rights, to the more recent Corporate Sustainability Due Diligence Directive (CSDDD). The researchers note that, while the development of voluntary frameworks has helped to raise awareness of businesses’ responsibility for addressing human rights issues, they have not had sufficient impact. With the stronger regulatory frameworks that are currently emerging, the study urges governments to establish and enforce clear performance standards and metrics that can be leveraged to effectively assess corporate compliance and hold companies accountable. We note that clear standards and KPIs on human rights could also be leveraged by investors looking to understand the ESG performance or simply the reputational and legal risks of the companies in which they invest. Through their stewardship functions, investors may also spur positive actions from companies on the protection of human rights. 

ESMA announces focus areas for the year ahead, with CSRD prime among them 

This week, the European markets regulator, the European Securities and Markets Authority (ESMA), issued its annual corporate reporting statement – the European Common Enforcement Priorities (ECEP). This yearly guidance outlines ESMA’s areas of focus across the European Economic Area to ensure consistency and quality in corporate reporting and prevent misstatements. Included among the key topics for 2025 are “materiality considerations in reporting under the European Sustainability Reporting Standards”. For all intents and purposes, this means that the Corporate Reporting Sustainability Directive (CSRD), and the double materiality process upon which it is based, will be highly scrutinised over the next 12 months. Specifically, the regulator will focus on the aspects of business activities, relationships, geographies and considered stakeholders, and the transparency from companies on how they identified and prioritised engagements with stakeholders.  

More broadly, ESMA announced that it will be keeping a keen eye on the scope and structure of sustainability statements, including how they align to financial reporting and consider the full value chain. The third sustainability aspect of ECEP is investor-focused, with disclosures related to Article 8 of the Taxonomy regulation set to come under the microscope. The multi-faceted approach represents what seems to be a shift in the stance by the regulator, to being more hands on and compliance-oriented when it comes to sustainability reporting. There is a distinct anti-greenwashing theme, aimed both at companies and investors, with each required to fully recognise and report impact across entire footprints. 

Nature-related disclosures gain ground among corporates 

ESG Today reports that over 500 companies, representing a combined market capitalisation of more than $6.5 trillion, have committed to adopting nature-related corporate reporting aligned with the Taskforce on Nature-related Financial Disclosures (TNFD). This includes 129 financial institutions managing $17.7 trillion in assets and 25% of the world’s systemically important banks. Starting with fiscal years 2024 or 2025, these companies will publish TNFD-aligned disclosures as part of their annual corporate reporting. The companies that committed to do this span 54 jurisdictions, including 24 emerging markets, and cover 62 of SASB’s 77 industries—highlighting the growing global momentum. 

Meanwhile, over two-thirds of the 100 companies assessed by Nature Action 100, an investor-engagement initiative, have made public commitments to protect nature. Of the 69 companies setting nature-positive ambitions, 45 have also committed to addressing impacts across their value chains. However, the same study found that few companies disclose the methods they use for materiality assessments that identify their impacts and dependencies on natural systems. By undertaking and disclosing thorough materiality assessments and strong internal governance aligned with TNFD standards, companies will be better positioned to meet emerging regulatory requirements, build resilience, and secure stakeholder support. This proactive approach to nature allows them to target the most impactful and cost-effective actions, ultimately supporting both business and sustainability goals. 

UN-backed carbon market offers hope for beleaguered carbon offsets

With the carbon offsets market in the midst of an ongoing contraction, a Bloomberg article has pondered whether the new United Nations-backed market for trading carbon offsets could offer a lifeline, particularly for low-quality offsets tied to renewable energy projects. These offsets have long drawn the ire of climate experts who believe them to be “worthless”. This assertion is down to the fact that renewable energy already offers a competitive alternative to fossil fuels, with any additional funding from carbon credits unlikely to influence decisions about increasing renewable energy capacity. The UN-backed carbon market, which would cover both countries and companies, looks set to be ratified at COP29 and could be the solution for some of these “junk offsets ”. More than half of all carbons offsets – or 490 million tonnes to be exact – that have applied to transition to a new market are linked to renewable-energy projects. The markets seem to think the UN carbon offset market will make these offsets more credible and attractive, with hedge funds buying these offsets betting that the new trading market will enhance their value.

Although the UN-backed carbon market is undoubtably a positive step given the collective buy-in, there are endless cautionary tales with anything involving offsets. Any carbon offset must ensure additionality and accuracy to prove they are effective, while also including punitive measures for any abuse or fraud. Absent that, then the status-quo in the carbon offset market will likely persist.  

ICYMI 

• Kering, GSK and Holcim have become the first companies to publicly adopt validated science-based targets for nature, Responsible Investor  
• UK pension experts are pushing for “more focused manager engagement” over imposing additional ESG disclosure requirements.   
• The Times reports the launch of a new Irish sustainability website, Fabric of Change, aimed at educating consumers about their clothing consumption habits. 
• ESG implementation has hit an all-time high in EMEA as investors around the world step up allocations to multi-thematic ESG strategies, according to Investment Week.